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Market Update

Schwab clients get the latest in-depth U.S. market news as well as analysis and commentary from respected sources, both proprietary and third party.

Posted: 4/20/2018 4:15 PM EDT

Stocks Trade Lower Amid Empty Domestic Docket

U.S. stocks continued the previous session's decline, chipping further away at modest weekly gains as Treasury yields continued to rise and despite some upbeat quarterly reports from Dow member General Electric and Honeywell. Tech stocks were amidst the leading laggards and the Nasdaq again logged the largest decline among the major domestic indexes. Crude oil prices reversed an early contraction and ticked higher, gold was lower and the U.S. dollar extended its recent rise, while the domestic economic calendar was void of any major releases.

The Dow Jones Industrial Average (DJIA) declined 202 points (0.8%) to 24,463, the S&P 500 Index was 23 points (0.9%) lower at 2,670, and the Nasdaq Composite fell 92 points (1.3%) to 7,146. In moderate volume, 921 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.09 to $68.38 per barrel and wholesale gasoline was $0.01 higher at $2.08 per gallon. Elsewhere, the Bloomberg gold spot price dipped $9.48 to $1,336.05 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.4% at 90.33. Markets were higher for the week, as the DJIA gained 0.4%, the S&P 500 Index increased 0.5%, and the Nasdaq Composite advanced 0.6%.

Dow member General Electric Co. (GE $15) reported Q1 earnings-per-share (EPS) of $0.04, or $0.16 ex-items, compared to the $0.12 FactSet estimate, as revenues rose 7.0% year-over-year (y/y) to $28.7 billion, above the expected $27.6 billion. The company said aviation, healthcare, renewables and transportation grew earnings, and its power unit is making progress, but the industry continues to be challenging and is trending softer than its forecast. GE reaffirmed its full-year guidance. Shares rose.

Honeywell International Inc. (HON $151) posted Q1 EPS of $1.89, or $1.95 ex-items, compared to the forecasted $1.90, with revenues rising 9.0% y/y to $10.4 billion, north of the estimated $10.0 billion. The company said it saw strong demand for original equipment for commercial aviation and U.S. defense, as well as continued sales and order growth in warehouse automation. HON increased its full-year guidance. Shares traded higher.

Wells Fargo & Co. (WFC $53) gained ground after the company announced that it will pay $1.0 billion in fines to settle probes by U.S. regulators into mistreatment of consumers pertaining to auto-lending and mortgage loans. WFC will take a retroactive Q1 charge, which it warned of last week after posting quarterly earnings and revenues that topped forecasts but net interest income that missed.

Treasury yields in focus as economic calendar dormant to close out the week

Treasuries finished lower with the economic calendar void of any major releases today. The yield on the 2-year note increased 3 basis points (bps) to 2.46%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 2.96% and 3.14%, respectively.

Bond yields continued to grind higher, with the yield on the 10-year bond hitting the highest level since 2014, and the U.S dollar extended its gains as of late. These moves may have fostered concerns about tighter financial conditions and helped lead to the extension of yesterday's decline that snapped a rally earlier in the week for the stock market into positive territory for the year. Schwab's Chief investment Strategist Liz Ann Sonders had cautioned investors about this in her latest article, Gettin' Tighter: Financial Conditions' Effect on Stocks, noting that volatility is likely to remain high this year and investment discipline remains essential, adding that with all the focus on tariffs, trade, and the FAANG stocks; lost among those headlines is perhaps a more important fundamental reversal in financial conditions.

Stocks finished modestly higher for the week, rising along with bond yields, the greenback and crude oil prices, courtesy of a solid start to earnings season with lofty expectations, a persistently strong economic backdrop, and resurfacing inflation expectations, along with relatively calm global trade and geopolitical concerns. Of the 87 S&P 500 companies that have reported thus far, about 67% have topped revenue estimates and approximately 84% have bested profit projections, per data compiled by Bloomberg. The week saw March retail sales rise, housing construction activity and industrial production top forecasts, while the Fed's Beige Book noted continued economic expansion. Crude oil's rally, with WTI breaching the $68.00 per barrel level for the first time since 2014, comes on the heels of the flared-up geopolitical concerns, amplified by OPEC talks about possibly continuing output cuts and bullish government oil inventory data.

Schwab's Chief Fixed Income Strategist, Kathy Jones addresses the question of Treasury Bond Yields: How High is High?, in her latest article, while our commentary, Late in the Cycle: Market Volatility in Context, takes a look at the market environment.

Next week, the economic calendar will heat up along with earnings season, with new and existing home sales being accompanied by Consumer Confidence, preliminary durable goods orders, Markit's preliminary business activity reports, the final University of Michigan Consumer Sentiment Index, and the first look (of three) at Q1 GDP. As noted in theSchwab Market Perspective: Keeping Things in Perspective, investors who keep the endless flow of news in the proper perspective stand a better chance of being successful. For now inflation has remained relatively contained but with a tight labor market and continued economic growth—combined with the tailwind of tax cuts and the moving of company cash held overseas to the U.S.—inflation is likely to accelerate further, which is a market risk that investors may be overlooking.

The international docket next week will also deliver some key reports: Australia—consumer price inflation. China—industrial profits. Japan—Bank of Japan monetary policy decision and industrial production. Eurozone—Markit's business activity reports and European Central Bank monetary policy decision, along with German business confidence. U.K.—preliminary Q1 GDP.

Europe mixed on earnings and global concerns, Asia mostly lower

European equities finished mixed, with the euro and British pound losing ground versus the U.S. dollar, amid the greenback's extended gains and following dovish commentary from central banks. Bank of England Governor Carney dampened expectations of a rate hike next month and euro-area officials suggested that the European Central Bank sees scope to wait until their July meeting to announce plans to end their bond-buying program, per Bloomberg. The rise in bond yields has caused some concerns to ramp about tightening financial conditions and the tech sector remained bogged down by flare-ups in skittishness toward the chip sector and concerns toward Apple Inc. (AAPL $166).

Bond yields in the region finished mixed, while eurozone consumer confidence unexpectedly improved for April. Economic data in Europe has seen a soft patch, adding to the festering volatility and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, delivers his article, From Overheating to Underwhelming: Is the Economy Hurting Stocks, while also discussing When Will the High Volatility End?, in his latest commentary, noting that April may bring a halt to the decline in stocks, but heightened volatility may not be going away. Jeff stresses that staying invested with a diversified portfolio may be the best way to “master” investing in the coming years.

Stocks in Asia finished mostly to the downside following the snapped winning streak in the U.S. yesterday. The downward move came amid flared-up concerns about tighter financial conditions and worries about chip stocks that pressured the tech sector. Japanese equities declined, with losses being held in check by the yen's continued dip from a recent gain, while the nation reported that the rise in consumer price inflation decelerated as expected for March. Stocks trading in both mainland China and Hong Kong dropped, while South Korean shares also declined. Australian securities traded lower and Indian equities finished flat, continuing to pause from a rally as of late. With volatility looking to remain elevated, Vice President and Alternative Beta and Asset Allocation Strategist for the Schwab Center for Financial Research, Anthony Davidow discusses 4 Ways to Play Defense.

Schwab Center for Financial Research - Market Analysis Group

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